Courtside Acquisition Warrants (“CRB/WS”) represent a good speculation at this reward to risk ratio. The voting for the acquisition will be held tomorrow at 10 am. I would like to warn the club that I may not inform the club of subsequent sales or trades of these warrants after the vote.

 

Courtside Acquisition(“CRB”), a SPAC, has announced the purchase of American Community Newspapers (“CAN”), a community newspaper publisher with operations in four major U.S. markets – Minneapolis – St. Paul, Dallas, Northern Virginia (suburban Washington, D.C.) and Columbus, Ohio. The Columbus operations were acquired by ACN on April 30, 2007. In these markets, it publishes three daily, and 83 weekly newspapers, each serving a specific community, and 14 niche publications, with a combined circulation of approximately 1,386,000 households as of April 30, 2007.

 

There is a good background on SPACS by steve308.

 

The simple thing to remember is that if 20% of shareholders vote no, shareholders who voted no gets the “cash in trust” back and the warrant goes to zero.  Until the voting day, the warrants trade as a proxy for the binary outcome of the vote. In CRB/WS case, the cash per share is 5.66. The warrants are struck at 5. So, the in-the-money value is 66 cents, and the warrants last traded at 37 cents.  This in-the-money value has some practical value until the vote and for a short period of time after the vote.  Ultimately the value of the warrant depends on whether the purchase price paid for the acquisition is worth the value they get. However, for a tradable short period of time, this in-the-money value has some importance.  Until the voting day, while CRB trades below 5.66, arbitrageurs come and vote “no” to get an annualized return.  So the insiders and parties who want the deal to happen would like for the stock to trade near or above the 5.66 value to discourage the arbitrageurs.  After the vote is made, then the stock will get closer to what market perceives to be the value of the acquisition. This process can take from as low as 1 day to several days.  In the meantime, the warrants have to trade near the parity value or arbitrageurs can come into play. Furthermore, if the vote is approved, the time value of the warrant which expires in 2009 starts going up.  This cushion of incoming time value and the “in-the-money” value makes me believe that there is an 80 to 90% upside in the value of the warrants for at least a tradable period of time over the next 2 days.

 

4 possible scenarios can happen

1.)Deal voted down, warrants go to zero.

2.)Deal voted yes, stock price stays at 5.66, and warrants trade at .66 plus time value.

3.)Deal voted yes, stock price goes up if market perceives the acquisition is worth more, and warrants trade even higher than 2.

4.)Deal voted yes, stock price drops as market perceives acquisition to be worth less, and warrants will drop from the in-the-money value offset by the increase in time value.

 

I think the only way you lose money is 1.) and possibly 4.) But even if 4.) were to happen, I think there is enough time to sell after the vote to still make money on the trade.

 

What are the chances of 1.) happening?

So far, only 4 SPACS were voted down out of 30 since 2003. ).  And I think one of them was voted down because Amaranth was in liquidation.  While we have a small sample, this is only about 11% of SPACS being voted down. Since then, SPAC insiders have become smarter and work harder to make a deal go through. Their investment in time, commitment and money make them incentivized to do so. They put more cash in the company (as in the case of SEA), they lower their carry (as in the case of Acquicor) or they buy shares in the open market (as with many of them).  Furthermore, with respect to CRB, I suspect the insiders have done enough to get the positive votes they want.  They had supported the stock price to trade near the 5.66 level to prevent the arbitrageurs from coming in.  They opened their wallets to buy shares as shown below:

 

BRUCE M GREENWALD[President] BUY 151,762 at $5.63 on 05/21/2007

RICHARD D GOLDSTEIN[Chairman and CEO] BUY 151,762 at $5.63 on 05/21/2007
16-May-07 GOLDSTEIN RICHARD 3,762 Direct Purchase at $5.60 per share-$21,067
16-May-07 GREENWALD BRUCE 3,762 Direct Purchase at $5.60 per share-$21,067
14-May-07 GREENWALD B 103,600 Direct Purchase at $5.61 per share-$581,196
14-May-07 GOLDSTEIN R 103,600 Direct Purchase at $5.61 per share. $581,196

 

The proxy further shows management has loaned money to CRB to last through the vote. While I have no dialogue with management, I suspect they would do more if they know they haven’t done enough to get the votes.  In other words, they have spent enough time, money and commitment not to see this go through. You might ask why this is not reflected in the warrants price?  I think the asymmetrical information is the nature of SPAC situations. Even if insiders and big holders know the deal will go through, they will not risk SEC investigations by buying the warrants near the voting date because they possess “material information”.

 

Scenario #4 is harder to handicap.  I would not even try. However, I will spend the next half of the write-up valuing the acquisition and I will make the case that they are not overpaying for the acquisition. If this is so, then chances of losing money with Scenario #4 is quite low, notwithstanding the fact the time value alone may be worth more than the 37 cents it is trading at now.

 

 

CRB is paying approximately $206,000,000 (of which up to $12,500,000 may be paid in shares of Courtside common stock valued at $5.70 per share and the balance will be paid in cash), subject to certain increases or decreases, including adjustments for working capital, plus, if certain newspaper cash flow and Courtside stock price targets are achieved, up to an additional $25,000,000. Courtside will borrow approximately $133,000,000 to fund the cash portion of the purchase price (financing is already in place with Bank of Montreal), which will supplement the approximately $78,150,000 of funds in Courtside’s trust account that will also be used for that purpose. If conversions into cash of our Public Shares (as defined below) exceed $4.2 million (5.3% of the Public Shares), CRB will be required to obtain additional financing in order to be able to close the acquisition

 

Buffett has been known to say that “If the internet was invented today, there would be no newspapers.” Certainly the economics of newspapers are becoming less favorable. However, I argue that ACN has better outlook for its economics than the Tribune or New York Times.  I enumerate the following points:

 

1.)    They have always been operating in the “free” paper business model and are profitable.  NYTimes and the Tribune are still struggling with the free model as a result of the internet’s rise.

2.)    The audience are the rural communities who want to know about local sales events, local stories, local schools, etc. It serves the D.C., Virginia, Minnesota, and Cleveland market. X households. Only 4% of revenues are circulation, 96% is ad revenues. They are hence less prone to declining circulation numbers that the national newspapers are experiencing.

3.)    Opportunities for consolidation. Evidence of this was the recent acquisition of Columbus operations by ACN in March 2007. Had the Columbus operations been acquired by ACN on January 1, 2006, ACN’s 2006 revenues would have been increased by $23.3 million (44.5%) and its assets at December 31, 2006 would have been increased by $45.6 million (47.6%).

4.)    The CRB insiders have had a history of investing in new media private equity deals and chances are they can think of taking advantage of the internet to increase the value of the franchise.

5.)    Operating margins have improved in the last couple of years and the sellers have incentived bonsuses to reach targets.

6.)    The Banks agreed to finance their debt so they must be somewhat comfortable of the EBITDA targets. From the proxy: “The projections that Capitalink utilized in their analysis project an improvement in EBITDA from FY2006 to FY2010, from approximately $16.4 million to $27.8 million, respectively. After deducting capital expenditures ($1.1 million in 2006 combined among ACN and Columbus and assuming such amount is constant in the future) from EBITDA and assuming no material additional expenditures that would reduce cash flow, Courtside would have sufficient funds to cover the total cash interest and scheduled principal paymen’ts in each of the years 2007 through 2010.”

7.)    Historical Financials

. 

 

			Three Months ended April 1, 2007 (unaudited)						Three Months ended April 2, 2006 (unaudited)						Year ended December 31, 2006						Year ended January 1, 2006						Year ended December 26, 2004(1)						Period from December 10 through December 26, 2004						Period from December 29, 2003 through December 9, 2004(2)
Statement of Operations Data:
Net sales					$12,500						$10,638						$52,194						$39,546						$34,195						$1,401						$32,794
Operating income					$1,611						$1,207						$9,554						$6,562						$5,234						$33						$5,201
Net income (loss) from continuing operations					$376						$34						$4,628						$2,306						$1,122						$(140	)					$1,262
Net income (loss)					$376						$34						$4,626						$6,898						$1,828						$(60	)					$1,888
Earnings per share:					N/A						N/A						N/A						N/A						N/A						N/A						N/A

				As of April 1, 2007 (unaudited)						As of December 31, 2006						As of January 1, 2006
Balance Sheet Data:
Current Assets					$	6,528					$	6,474					$	5,386
Total assets					$	95,249					$	95,964					$	90,287
Current Liabilities					$	10,415					$	10,789					$	8,664
Long-term liabilities					$	46,940					$	47,656					$	48,730
Member’s equity					$	37,894					$	37,519					$	32,893
(1)	The year ended December 26, 2004 includes the combined operations of ACN and its predecessor, American Community Newspapers, Inc.

 

 

 

Valuation:

They are paying less than 8.3 times 2010 EBITDA, 12.5 times 2006 EBITDA.  This equates to less than 8.6 times 2010 EBITDA less capex, and less than 13.2 times 2006 EBITDA less capex.  Based on this reasonable valuation, plus the better economics versus the national newspapers, I think that losing money on a scenario #4 is not very high.

 

It would be important to know what management would do with the free cash flow.  I suspect most of it will go to paying back debt as they are taking huge debt.  If enterprise value were to stay the same, then the stock price should go up over the long run. For this particular write-up, I ran into time constraints and had not had time to study management. However, I wanted to post it as the opportunity window is the next 24 hours.  To make the case of holding this long-term after the vote, I have to admit, further due diligence has to be done with management.  On the other hand, if we summarize the odds.  I think there is a 15% chance scenario 1 happening(this is being very conservative). There is another 10% chance of Scenario 4 happening but still won’t lose money.   A Kelly formula would be 75% chance of making 80% yields putting 44% of portfolio and expected value of 33%.  That seems too high a percentage, but I say it is a worthwhile speculation of 2% of portfolio and you can make 1.6 to 2% on the entire portfolio in one day.

Risk

I have not done due diligence on management. I have to say that the management team of CRB and ACN have a long history of working together so I think the team execution risk is somewhat lowered.